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  Concept of Equivalent Production

Introduction to Concept of Equivalent Production

In the instances provided above, there was no stock of work in progress at the end of the specific period and though the question of valuation of similar does not take place. Though in practice it might occur that at the end of a specific period, there may be a number of incomplete units in the process. Additional the degree of finishing point of the opening work in progress and closing work in progress might be dissimilar. These incomplete units will generate problems in finding out the cost per unit, like all the units will not have similar degree of completion. In such type of cases, the equal units will have to be worked out for the incomplete units. The idea of equivalent units says that 2 units, each complete 50% will be treated like equivalent to 1 completed unit. This idea will have to be used for solving the problem of incomplete units. For this, degree of completion will must be ascertained for each element of cost that is labour, material, and overheads. The following techniques of pricing are employed for valuing the equivalent units.

  • First In First Out Method [FIFO]: In this technique, the supposition is that the incomplete units from the opening stock are finished first and then the units introduced in the process are done. The costs added in each process throughout the current period are prorated to the production essential to done the opening work in progress, to done the units added in the process and units in the work in progress. The aim of the first in first out method is to value the inventory at the current costs and like such the major problem is to computed the equal production within this technique.
  • Average Method: Process costs are occasionally calculated on the basis of average costs. In which degree of completion of opening work in progress is not provided, average method is employed. The average process cost is acquired through adding the cost of opening work in progress in the cost of units that is introduced in the process throughout the current period and dividing this total cost through total equivalent units acquired by adding the number of units done and equivalent units of the closing work in progress of every element, material, labour and overheads. The major purpose of average method is to even out the fluctuations in prices and though is employed when the prices fluctuate extensively throughout a specific period.
  • Weighted Average Method: The weighted average method is employed if a manufacturing unit is manufacturing two or more products that are quite not similar to each other. Within this technique, weighted average is calculated and employed in valuation of the incomplete units.

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